How to Save for Retirement: A Simple Guide to Achieve Your Dream

Most of us aren’t born knowing how to save for retirement. So here’s everything you need to know to simplify the process and help you succeed.

How to Save for Retirement
Updated July 7, 2024
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There are various methods for saving for retirement, including employer-sponsored 401(k) retirement plans, individual retirement accounts (IRAs), and personal savings.

According to a 2021 FinanceBuzz retirement survey, 21% of Americans haven’t started saving for retirement, and 35% said they don't know what they need to save at their target age. In this guide, we’ll discuss these methods in detail, so you can choose the best approach for your retirement goals.

In this guide to saving for retirement

How to save for retirement

If you’re approaching retirement age or just thinking about the future, then you know saving for retirement is important. Figuring out how to save for retirement can feel overwhelming, but in reality, there are steps you can take during every stage of your life that can make the task easier.

How to save in your 20s

You may be starting your professional life in your 20s, meaning that your savings may grow at a slower rate compared to later stages in life. That being said, there are several moves you can make to give your savings an edge:

  • Start a budget to control your expenses: One popular method is the 50/30/20 rule, where 50% of your income covers needs, 30% goes to wants, and 20% to savings. If saving 20% isn’t possible in your 20s, save what you can and aim to increase it over time.
  • Build an emergency fund: Your 20s are ideal for developing good financial habits, like creating an emergency fund. This fund can prevent expensive credit card debts or high-interest loans, allowing you to concentrate your income on savings and other financial necessities.
  • Start contributing to your retirement plan: Particularly if your employer matches 401(k) contributions. Even small contributions now can set you on the right path for retirement.

How to save in your 30s

You may have a higher income in your 30s compared to the first decade of your earning years. This means you may earn enough money to save toward retirement, especially if you continue to exercise good money habits.

Continue growing your retirement savings using these moves:

  • Optimize your budget: Maintain a smart budget even as you begin earning more money. This is especially true for people who have already started or plan to start a family in their 30s, which usually comes with more financial responsibilities.
  • Increase your savings rate: While savings rates are often low in your youth, they can grow as your income does. For example, you could boost your savings rate by 1% annually, moving from 5% of your income in your early 20s to at least 15% in your 30s.
  • Open your own investment accounts: The first step to investing is usually through your employer’s 401(k) plan, but your 30s can be the time to begin investing on your own. For instance, consider opening one of the best Roth IRAs or best brokerage accounts to diversify your investment options and improve your tax strategy.

How to save in your 40s

When you reach your 40s, you may enter your peak earning years. That means it’s time to accelerate your savings. At the same time, you may want to begin thinking more about your finances after you retire.

Some essential moves to take in your 40s include:

  • Get out of debt: It can be tough to save when debt and interest charges weigh you down, so work on reducing or eliminating your debt balances.
  • Check your asset allocation: Annually reviewing your asset allocation is wise. You might have a stock-heavy portfolio in your youth for compounded growth. As you age, consider shifting to a more conservative investment mix.
  • Start investment accounts for your children: If you have kids, you may want to start investment accounts for them in your 40s, if not sooner. For instance, you may decide to start a tax-advantaged 529 plan to save for their college education.

How to save in your 50s

For some people, this decade will be the last full decade of working full-time. If you don’t quite have all your ducks in a row yet, now is the time to set yourself up for a financially secure retirement.

  • Max out your contributions: Even if retirement is near, maximizing retirement contributions can be beneficial. These accounts, like 401(k) plans and traditional IRAs, offer tax benefits that can enhance your retirement savings.
  • Use catch-up contributions: If you’re over 50, you can make additional catch-up contributions to retirement accounts like 401(k)s and IRAs. In 2023, you can add up to $7,500 extra to 401(k)s and $1,000 to IRAs, helping you reach your retirement goals faster.
  • Keep your money invested: Withdrawing from your retirement account for expenses can affect your investment strategy and retirement funds. Non-Roth accounts usually have an early withdrawal penalty before age 59 1/2. So, it’s advisable to continue earning and using your income until penalty-free withdrawals are possible.

How much to save for retirement

Start your retirement planning by calculating your monthly expenses. Record recurring costs like food, utilities, and healthcare in a spreadsheet. If you mostly use credit or debit cards, consider downloading a monthly transaction list.

To estimate your annual retirement expenses, multiply your monthly expenses by 12. Remember, this is a rough estimate and doesn’t account for inflation or changes in spending habits.

In retirement, some expenses, like transportation, may decrease. Some other expenses, like healthcare, may increase. Experts suggest that you’ll likely need 70% to 90% of your pre-retirement income, indicating a slight drop in total expenses.

Retirement savings by age and annual salary 

You can also gauge your retirement savings progress using your annual salary. Aim to save these multiples of your salary by each age milestone:

  • By 30: 0.5 times your salary
  • By 40: 1.5 to 2.5 times your salary
  • By 50: 3 to 3.5 times your salary
  • By 60: 6 to 11 times your salary

Keep in mind
These numbers are only general guidelines. Use them as goals to target or benchmarks to measure your progress.

Where to save for retirement

Your first step to meeting your retirement savings goals is figuring out where to put your money. This means both knowing where to save and how to invest money. The right retirement savings accounts can help you reach your financial goals in a timely manner and make the most of every dollar. Here are the three main options you can put your money into when saving for retirement.

1. Emergency fund and rainy day fund

Saving for retirement isn’t just about pensions and retirement funds, it’s also about having cash available for when things go awry. Your emergency fund and rainy day fund can help you avoid dipping into your tax-advantaged accounts when unexpected costs crop up. One of the biggest detriments to long-term retirement savings is pulling money out of your retirement accounts early.

For example, without an emergency fund, you may decide to withdraw money early from your retirement account. This may result in a penalty from the IRS — on top of a potentially bigger tax bill.

Not only that, but the money is no longer earning compounding returns in your investment account. That opportunity cost can lead to financial problems down the road in your retirement and may generally impact your investment returns.

Make sure you’re saving money for unexpected costs in savings accounts or taxable investment accounts that are accessible. A high-yield savings account can be good for these sorts of emergency funds. This way, you can cover expenses without drawing on your retirement accounts.

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2. 401(k) plans

A 401(k) is a special type of account that helps you save for retirement. It’s usually set up as an employer-sponsored retirement plan, but if you’re self-employed and don’t have any employees, you can set up a solo 401(k).

A part of your paycheck goes into your 401(k) account with every contribution. Your plan manager typically chooses to invest this money in different things like mutual funds or exchange-traded funds (ETFs). The assets your money buys are typically maintained for a while, with occasional portfolio rebalance when needed.

401(k) plans can receive their tax advantages as either Roth 401(k) or traditional 401(k):

Roth 401(k) Traditional 401(k)
  • Made with after-tax dollars
  • Doesn't lower current taxable income
  • Tax-free withdrawals
  • Earnings grow tax-free
  • Made with pre-tax dollars
  • Lowers current taxable income
  • Taxable withdrawals
  • Earnings grow tax-deferred

When deciding between a Roth or traditional 401(k), think about whether you expect to pay more taxes now or in retirement. If you think your taxes will be higher when you retire, a Roth might be a good choice. You can also choose to use both types of 401(k)s.

401(k) annual contribution limits
Each year, the IRS reviews inflation and other factors to determine contribution limits to tax-advantaged accounts. For 2024, the 401(k) contribution limits are $23,000, plus another $7,500 in catch-up contributions (for a total of $30,500) if you’re at least 50 years old.

Remember to utilize your employer contribution to your 401(k) if it’s available. It’s essentially free money that compounds over time, enhancing your retirement savings. For instance, if your employer matches 50% of your contributions up to 6% of your $50,000 salary, you could gain an additional $1,500 annually.

3. IRA plans

Individual retirement accounts (IRAs) offer another way to save for retirement, especially if you work part-time or don't have access to a workplace 401(k) retirement plan. You can open an IRA with many of the best investing apps and best online brokerages like Robinhood2, Fidelity, and Charles Schwab.

IRAs are flexible. You can invest in stocks, bonds, mutual funds, ETFs, and even some businesses, real estate, and precious metals. 

Just like 401(k) plans, IRAs can receive their tax advantages as either Roth IRAs or traditional IRAs:

Roth IRAs Traditional IRAs
  • Contributions are not tax-deductible
  • Income caps can prevent high earners from contributing
  • Qualified withdrawals are not taxed
  • Contributions may be tax-deductible
  • No income caps or a maximum income limit
  • Withdrawals in retirement are taxed

Roth IRA contributions have income limits. If your income exceeds a certain threshold, you can’t contribute to a Roth IRA. But you might still qualify for tax-deductible contributions to a traditional IRA depending on your income and whether you or your spouse have a 401(k) at work.

IRA annual contribution limits
IRA contribution limits are lower than 401(k) limits. For 2024, the limit is $7,000 plus an extra $1,000 (for a total of $8,000) if you’re 50 or older.

Keep in mind that there are more types of IRAs that serve different purposes, including helping small business owners and their employees, spouses without income, and more.

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How to optimize retirement savings with tax planning

When saving for retirement, tax planning is essential. While there’s no way to know exactly what will happen, giving some thought to your tax situation today and your likely tax situation in the future can help you make better decisions with your retirement dollars.

Roth vs. traditional tax benefits 

Roth IRA contributionsTraditional IRA contributions
Roth contributions use after-tax money, allowing your investments to grow tax-free. You won’t pay taxes on withdrawals later. Traditional contributions use pre-tax money, giving you a tax break now and deferred tax growth. You’ll pay taxes when you withdraw funds later.

Roth contributions let you pay taxes upfront, freeing you from future tax worries. But they don’t offer immediate tax breaks. So, if you aim to cut your current tax bill, a Roth account won’t assist.

A traditional account gives you an immediate tax break, putting more money in your pocket now. However, if your tax rate rises by retirement, you’ll pay more taxes on withdrawals.

If you’re at the start of your career with a smaller income, Roth contributions could be advantageous due to your lower current tax bill. As your income and tax bracket increase, switching to traditional contributions could be beneficial.

Remember, you can use both account types for retirement tax efficiency. It’s wise to consult a tax professional or retirement specialist to understand tax implications and plan withdrawals effectively.

How to use the rollover strategy

Choosing an account doesn’t mean you’re locked in. You can strategically move money between accounts based on your retirement plan or if your plan changes.

The simplest strategy is to match the tax rules. For example, you could move money from a traditional 401(k) to a traditional IRA, or from a Roth 401(k) to a Roth IRA. If the tax rules differ and you’ve already benefited from tax advantages on your traditional contributions, you may need to pay taxes when moving money. Always consult a tax professional before transferring money between retirement accounts.

How to diversify your savings with taxable accounts

If you’ve reached your 401(k) and IRA limits or want to diversify, consider a brokerage account. This taxable account can help grow your wealth and offers more access to your money without the 10% early withdrawal penalty of most retirement accounts.

You can open a taxable account with a traditional brokerage, online platform, robo-advisor, or investment app. For instance, I use Acorns and M1 Finance for penalty-free access to money before age 59 1/2 and to achieve other goals. I’ve also used Betterment for various financial goals.

Remember, these accounts are subject to capital gains tax. Long-term gains on investments held over a year have a lower rate, while short-term gains are taxed at your marginal rate.


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How to budget for increased retirement savings

Part of being able to put money aside now and also live on a fixed income in the future means being able to live on a budget. There are a lot of easy ways to save money — here are a few ideas.

1. Trim your bills

One of the best ways to reduce your costs is to review your bills and look for ways to save. For example, you might be able to save money on utilities by switching your provider. Additionally, there are services like Rocket Money that help you reduce your cable, phone, and internet expenses. Look for ways to reduce your monthly costs, and put the savings in your retirement account.

2. Use cashback apps

Rather than always cutting costs, you can also get a little extra cash back on purchases you’d make anyway. There are several cashback apps that can provide you with a way to get money on planned purchases. Capital One Shopping, Fetch, and Ibotta are just a few of the cashback apps that can help you boost your retirement savings.

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3. Pay off your debt

Another way to cut your budget is to reduce your debt. The interest you pay on debt reduces the amount of money you have that could be going toward retirement. Make a plan to have all your credit card debt and other debts paid off by the time you retire.

Some strategies you can use to pay down your debt include:

  • Debt consolidation: Consolidate your debts in one place with a loan that pays off your smaller debts. If you can get a lower interest rate, you may save on payments and interest and get out of debt faster.
  • Balance transfer credit cards: If you can find a 0% APR balance transfer credit card, you can really tackle your debt. When you aren’t paying interest, you end up able to reduce your debt faster and save money in the long run. Our list of the best balance transfer cards is a good place to start your search.
  • Debt snowball or debt avalanche: These strategies help you order your debts in a way that allows you to tackle them with a manageable strategy. With the debt snowball method, you focus on your lowest balance first, putting extra payments toward one loan while maintaining the minimum on other accounts. The debt avalanche method uses the same concept, but you start with the highest interest debt.

No matter how you go about it, the important thing is that you reduce your debt and get in a position to put that money toward retirement.

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Saving for retirement FAQ

What percentage of your income should you save for retirement?

As a general rule of thumb, you should aim to save 15% of your income over the course of your career in order to make sure you have the money you need for retirement. However, you may wish to set individual retirement goals based on the age you start saving, your investment risk tolerance, and your retirement timeline. Online retirement calculators can help you set a target amount for retirement savings and then break that down into small goals so you can determine what to invest each month.

Why is it a good idea to start saving for retirement early?

Starting early to save for retirement is important to ensure you have sufficient retirement income and can pay for all your needs, including health care, which tends to be very expensive for retirees. When you start saving early, you have more time for your money to work for you. Your investments can earn money, which can be reinvested and also earn returns for you. This is called compound interest, and it makes it easier to save enough for a secure retirement.

Is it worth it to work with a certified financial planner for retirement?

Working with a certified financial planner (CFP) can sometimes make sense if you are interested in learning how to invest money or are unsure about asset allocation or your risk tolerance.

However, if you are willing to do the research into these topics on your own, you may not need the help of a professional. Many people are able to build a successful retirement investment portfolio by making simple choices, such as investing in ETFs, even without professional financial advice.

What is a target-date fund?

target-date fund is a fund that gives you exposure to the stock market while ensuring you have the appropriate asset allocation.

With a target-date fund, you specify the year you plan to retire. The fund typically invests in a mix of appropriate assets based on your timeline. As you grow older and get closer to retirement, your investments will likely be shifted to more conservative ones without your having to do anything.

Target date funds could potentially be a good solution if you aren't sure how to determine your risk tolerance and you don't want to learn about asset allocation. But you give up more control over your investments and may pay higher fees than if you managed a portfolio of ETFs on your own.

How to save for retirement: bottom line

Social Security benefits are not likely to be enough for you to live your target retirement lifestyle. Instead, you should know how to save for retirement using other methods. Talk to a tax professional and/or a financial advisor for financial planning and investment advice. Professionals can help you formulate your retirement savings plan. Stick to it to build a comfortable nest egg over time.

Author Details

Yahia Barakah, CEPF

Yahia Barakah, CEPF, is a Senior Editor at FinanceBuzz and has created finance-focused content since 2011. As a Certified Educator of Personal Finance, he has a background in institutional investment and asset management, as well as a deep passion for financial literacy.